CEO comment

A year of product renewal and the start of efficiency measures

The year 2013 was characterized by a very high activity level in the Volvo Group, with the largest product renewal in our history, the launch of a Group-wide efficiency program and measures to increase the focus on our core business.

The extensive product renewal that started with the launch of the new Volvo FH in the autumn of 2012 culminated in 2013. On the truck side we launched a completely new Volvo range in Europe, an all-new range of Renault Trucks, Euro 6 engines that significantly reduce emission levels, the heavy-duty UD Quester range for Asia and other growth markets and at the end of the year the Eicher Pro Series for India and other emerging markets. Volvo Construction Equipment and Volvo Penta launched engines that comply with the latest emission standards. Volvo Buses launched buses with Euro 6 engines, an updated coach program and an articulated hybrid bus.

Product renewal put pressure on earningsDuring 2013, the product renewal put pressure on the Group's profitability, both in terms of costs associated with the launches as well as in research and development. Furthermore we had extra costs for changing the industrial system to the new products. By mid-year 2014 we will be through the industrialization of the new generations of trucks and the phase-out of the old generations. It is, however, already clear that the customer reception of the new generations of trucks has exceeded our expectations and we have entered into 2014 with a new product portfolio that really strengthens the Group's competitiveness.

A number of our markets were relatively weak during 2013, and the Group's net sales declined by 9% to SEK 272.6 billion compared with SEK 299.8 billion in the preceding year. Operating income amounted to SEK 7,138 M (18,069) and was impacted by lower volumes, negative currency development, costs associated with the extensive product renewal, restructuring charges and a write-down of Volvo Rents, which was divested in the beginning of 2014.

Despite the costs associated with the extensive product renewal we maintained our financial position. At the end of the year the Industrial Operations' net financial debt was 29% of equity, which is below our target of a maximum of 35% under normal conditions. The Board of Directors proposes an unchanged dividend of SEK 3.00 per share.

We have entered into 2014 with a new product portfolio that really strengthens the Group's competitiveness.

Efficiency measuresWe also continued to have a high pace in the implementation of the measures connected to the Group’s strategy for 2013–2015. We decided to combine a number of measures under a Group-wide efficiency program, including a structural reduction of white-collar employees and consultants, restructuring of the industrial footprint in Europe and Japan, a more streamlined sales and service organization for trucks in Europe and a reorganization of the parts distribution globally. These measures are the consequence of the transformation that the Group is undergoing and aim to increase our efficiency and competitiveness. The program will result in restructuring costs totaling approximately SEK 5 billion. Annual savings are estimated at SEK 4 billion which will gradually generate results during 2014 and achieve their full effect by the end of 2015.

Strengthening our core businessDuring the year, we made a number of strategic decisions aimed at strengthening our core business. In January 2013, we signed an agreement to acquire 45% of the Chinese company Dongfeng Commercial Vehicles. Through this alliance, we will get a very strong position in the Chinese truck market, which is the world's largest. In early January 2014, the National Development and Reform Commission (NDRC) in China approved the strategic alliance. Completion is subject to certain other conditions, including the approvals from other Chinese authorities, but we aim to conclude the deal by mid-year 2014.

In December we decided to divest Volvo Rents in North America, and the transaction was completed at the end of January. As a consequence net financial debt in the Volvo Group's Industrial Operations was reduced by SEK 7.0 billion. Volvo CE will continue to sell products to Volvo Rents under the new ownership.

We also announced the acquisition of the Terex Corporation's rigid and articulated hauler business, which will strengthen Volvo CE’s position in the important earthmoving segment and extend the presence in light mining. The deal, which is subject to regulatory approval, is expected to be finalized during the second quarter of 2014.

2014 – The year of efficiency improvements The year we have left behind us was characterized by extensive product launches, which involved a lot of hard work in all parts of the Group and an elevated cost level. As I am writing this, we still have a couple of quarters ahead of us before we are completely through the Group's largest product renewal ever.

This year will be characterized by efficiency improvements, including a reduction in activities and costs, personnel reductions and measures to improve capital efficiency. All of this will play an important part in the work to provide a good return on the capital our shareholders have invested in the company and to achieve the Group's strategic and financial targets – to be one of the most profitable companies in our industry. This will also provide us with the maneuverability to continue to invest in product development, growth in new markets and ultimately to achieve our vision to become the world-leader in sustainable transport solutions.